Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Gold Price Closely Tracks Debt-to-GDP Ratio - 9th Apr 20
Gold, Silver and Rigged Market Socialism - 9th Apr 20
Going to School in Lockdown Britain, Dobcroft Sheffield - 9th Apr 20
Amazon Face Masks to Protect Against Covid-19 Viral Particles N95, FPP2, PM2.5, for Kids and Adults - 9th Apr 20
Is Natural Gas Price Ready For An April Rally? - 8th Apr 20
Market Predictions And The Business Implications - 8th Apr 20
When Will UK Coronavirus Crisis Imrpove - Infections and Deaths Trend Trajectory Analysis - 8th Apr 20
BBC Newsnight Focuses on Tory Leadership Whilst Boris Johnson Fights for his Life! - 8th Apr 20
The Big Short Guides us to What is Next for the Stock Market - 8th Apr 20
USD Index Sheds Light on the Upcoming Gold Move - 8th Apr 20
The Post CoronaVirus New Normal - 8th Apr 20
US Coronavirus Trend Trajectory Forecast Current State - 7th Apr 20
Boris Johnson Fighting for his Life In Intensive Care - UK Coronavirus Crisis - 7th Apr 20
Precious Metals Are About To Reset Like In 2008 – Gold Bugs, Buckle Up! - 7th Apr 20
Crude Oil's 2020 Crash: See What Helped (Some) Traders Pivot Just in Time - 7th Apr 20
Was the Fed Just Nationalized? - 7th Apr 20
Gold & Silver Mines Closed as Physical Silver Becomes “Most Undervalued Asset” - 7th Apr 20
US Coronavirus Blacktop Politics - 7th Apr 20
Coronavirus is America's "Pearl Harbour" Moment, There Will be a Reckoning With China - 6th Apr 20
Coronavirus Crisis Exposes Consequences of Fed Policy: Americans Have No Savings - 6th Apr 20
The Stock Market Is Not a Magic Money Machine - 6th Apr 20
Gold Stocks Crash, V-Bounce! - 6th Apr 20
How Can Writing Business Essay Help You In Business Analytics Skills - 6th Apr 20
PAYPAL WARNING - Your Stimulus Funds Are at Risk of Being Frozen for 6 Months! - 5th Apr 20
Stocks Hanging By the Fingernails? - 5th Apr 20
US Federal Budget Deficits: To $30 Trillion and Beyond - 5th Apr 20
The Lucrative Profitability Of A Move To Negative Interest Rates - Pandemic Edition - 5th Apr 20
Visa Denials: How to avoid it and what to do if your Visa is denied? - 5th Apr 20 - Uday Tank
WARNING PAYPAL Making a Grab for US $1200 Stimulus Payments - 4th Apr 20
US COVID-19 Death Toll Higher Than China’s Now. Will Gold Rally? - 4th Apr 20
Concerned That Asia Could Blow A Hole In Future Economic Recovery - 4th Apr 20
Bracing for Europe’s Coronavirus Contractionand Debt Crisis - 4th Apr 20
Stocks: When Grass Looks Greener on the Other Side of the ... Pond - 3rd Apr 20
How the C-Factor Could Decimate 2020 Global Gold and Silver Production - 3rd Apr 20
US Between Scylla and Charybdis Covid-19 - 3rd Apr 20
Covid19 What's Your Risk of Death Analysis by Age, Gender, Comorbidities and BMI - 3rd Apr 20
US Coronavirus Infections & Deaths Trend Trajectory - How Bad Will it Get? - 2nd Apr 20
Silver Looks Bearish Short to Medium Term - 2nd Apr 20
Mickey Fulp: 'Never Let a Good Crisis Go to Waste' - 2nd Apr 20
Stock Market Selloff Structure Explained – Fibonacci On Deck - 2nd Apr 20
COVID-19 FINANCIAL LOCKDOWN: Can PAYPAL Be Trusted to Handle US $1200 Stimulus Payments? - 2nd Apr 20
Day in the Life of Coronavirus LOCKDOWN - Sheffield, UK - 2nd Apr 20
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Three ETFS to Protect From Rising Interest Rates

Interest-Rates / US Interest Rates Mar 04, 2010 - 04:57 PM GMT

By: Ron_Rowland

Interest-Rates

Best Financial Markets Analysis ArticleWall Street is obsessed with interest rates. Many consumers are, too, especially anyone who wants to buy a home or car.

There’s a good reason for this: Debt — or you might call it “leverage” — is the lubricant that keeps the financial markets moving. Imagine a car without oil … it would soon grind to halt. The same is true of the modern economy.


We’ve been enjoying historically low interest rates for the last decade … even more so in the last two years. You know the party is going to end at some point. And I’m beginning to suspect the end will come sooner rather than later.

Debt keeps the economy moving.
Debt keeps the economy moving.

Whenever rates move back up, you won’t have to just sit still and accept it. Exchange-traded funds (ETFs) give you many ways to protect your principal and profit from rising rates. Today I’ll tell you about three of them …

Rising Rate Protection ETF #1: iShares 1-3 Year Treasury ETF (SHY)

A cardinal rule of debt is that overstretched, low-income borrowers pay higher interest rates. And right now no one is more burdened with debt than the U.S. government.

But there’s a twist: The U.S. is a global superpower that controls the world’s reserve currency. So we’ve been able to delay the inevitable, although we can’t do this forever.

When rates do go up, the first domino to fall will be long-term bonds: Treasury debt maturing in ten years or more. This means you can expect a stampede into the short end of the maturity scale. Then the shortest-term Treasury paper will go up in value simply because so many people will want to own it.

SHY is an ETF tailor-made for this scenario. It holds Treasury debt that matures in the 1-3 year range. This is a “sweet spot” for investors: Long enough to give you some time, but short enough to avoid long-term forecasting errors.

Could SHY get hurt if short-term rates go up? Absolutely. However, I still think this ETF will outperform long-term bonds over the next few years, all things considered. So take a look at SHY for money that you need to keep safe.

Rising Rate Protection ETF #2: ProShares UltraShort 7-10 Year Treasury (PST)

When interest rates go up, bond prices go down. That’s because newly-issued bonds will pay higher rates than older ones, which makes the old ones worth less.

The longer the maturity, the more the price is affected by rising rates. And the change can be significant for bonds in the 7-10 year range. That’s where an inverse ETF like PST can help. PST could rise as much as 10 percent for each 1 percent jump in the 10-year Treasury rate.

Interest rates and bond prices move in opposite directions.
Interest rates and bond prices move in opposite directions.

PST does this by shorting Treasury bonds. And while that can work for short-term trades, it’s not a very good long-term strategy …

You see, when you sell bonds short you become indirectly responsible for making interest payments to the bondholders. Moreover, PST employs 2x leverage, so you are effectively paying interest twice.

The best opportunity for making money with PST is to own it for no more than a few weeks when 10-year interest rates are going up. If you hang on after rates level off, you could actually lose ground and your profits will eventually disappear because of the interest payments.

Rising Rate Protection ETF #3: Direxion Daily 30-Year Treasury Bear 3x Shares (TMV)

If you believe long-term rates are headed up, and soon, TMV could be your ticket to major profits. It’s an inverse ETF that tracks 30-year bond prices with 3x leverage.

Suppose, for instance, interest rates spike higher and the 30-year bond price index falls 5 percent in a day … you can expect TMV to rise 15 percent on that same day. Yowza!

This leverage could also be a ticket to major losses. For example, if your timing is off, even by a few days, you could get your head handed to you. That’s why leveraged ETFs are intended only for the most aggressive investors.

Another thing to consider is the “Daily” part of the name. Leverage in TMV and similar ETFs is reset every day. Over time, this means the leverage factor on your shares could be much more than 300 percent — or much less. I explained how this works in more detail in my Understanding Leveraged ETFscolumn last year.

Am I telling you not to buy TMV? No, not at all. I’m just telling you to be very, very careful when trading leveraged and inverse ETFs. I don’t want you to learn this lesson the hard way. TMV can be a great tool when used correctly — and at the right time.

When will rates go up? I don’t know. All kind of factors influence the bond market. That’s why you need to start educating yourself now to get familiar with the alternatives that are available. Because whenever the time comes, you want to be ready to make the most of it!

Best wishes,

Ron

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules